Part 5
Dear Customers, Friends and Neighbors,
As I continue to write this monthly Q&A column (the 5th in our series) I hope you are finding it insightful to help you through these uncertain economic times.
Here is some information I hope you will find helpful:
Question: We hear so much about banks on the news these days. Are all banks alike or is there a difference?
Answer: No two banks are completely alike but to answer the question more accurately, there are three or four types of banks we should distinguish between. First there are the investment banks like Merrill Lynch, Morgan Stanley and Goldman Sachs. These are not really banks in the sense that they do not take in deposits and then turn around and lend out money. It is true that they do take in deposits in the form of money market mutual funds, but they do not make loans. They are not chartered or regulated by the OCC or the FDIC and their deposits are not insured by the FDIC. They are in the old sense of the term, investment houses. The second type of bank is the large national bank like Citi Bank, B of A, etc. With the exception of Wells Fargo, these banks are all headquartered on the east coast, in either New York or Charlotte North Carolina. These banks are generally regulated by the OCC and their deposits are insured by the FDIC.
Their branch networks generally cover the entire country, and some of these banks do business world wide. The third type of bank could be classified as a regional or super regional bank. These banks are classified as such due mostly to the asset size of these banks (between $5 billion and $100 billion) and the geographic markets they cover. The fourth type of bank is the community bank. This type of bank is represented throughout the US in the greatest number with over 5,000 community banks nation wide. Community banks are in most cases the back bone of the communities they reside within. Their shareholders live within the community. The deposits gathered are from within the community and those deposits are turned right back into the community in the form of loans. Community banks such as Heritage Oaks Bank are often one of the largest employers within the community and our employees all live and own homes in our community. Community banks are well known for what they give back to the community in support of non-profit organizations as well as the thousands of hours of volunteer work contributed each and every year. Community banks are either state or nationally chartered, and deposits are insured by the FDIC.
Question: Who are news people referring to when they report on the failure of the banking system?
Answer: In most cases, reference is either being made to the investment banks or the largest national commercial banks. When you hear talk about multi-million dollar bonuses or corporate jets, the discussion is directed towards the big guys. I am not aware of any community bank that owns a jet or pays multimillion dollar salaries and bonuses. It is unfortunate that the media paints community banks with the same broad brush that they paint the very large nationals and the investment banks with. In reality we are as different as night and day, and community banks are generally in much more sound financial condition.
Question: We hear daily about the Government rescue or TARP money being given to banks as a form of a bailout. What is this really all about?
Answer: I don’t have enough paper or time to discuss this issue in detail, as this is a very complex issue that will take years to completely unwind. The short answer is that the money is not being just given to anyone in the banking industry. Regardless of the size of the bank, the Treasury Department is making an investment into banks in the form of TARP under the CPP (capital purchase program) which carries with it a coupon interest rate of 5%. This investment is in the form of preferred stock issued by a bank and purchased by the government for each bank that receives the funding. The government is not giving or investing this money into just any bank either. Banks must apply for the funding and meet strict qualifying standards. There were exceptions to this in that the largest banks in our country are deemed by the government to be too big to fail, and regardless of their performance or condition, the government required each of the nine largest banks in the country to accept the maximum level of TARP funding available at the time the original program was rolled out in November of last year. The key points to remember with the TARP CPP program is that banks which receive this funding will be required to repay the money within certain time limits and that the community banks that have received this funding have met strict qualifying standards as part of the approval process. In addition, the government has imposed strict regulatory provisions on companies receiving these funds. In the case of Heritage Oaks Bank, we are already in full compliance with these new regulations, so our regulatory burden is no greater today than it would be without the funds. The benefit of $21 million in additional capital to our company far out weighs any regulatory downside attached.
Question: What will Heritage Oaks Bank do with its TARP money?
Answer: The first thing we will do is invest a small percentage of the funds to acquire government guaranteed mortgage backed securities. By doing this we, along with all of the other commercial banks receiving these funds, will assist in getting the housing industry back on its feet by providing a much neededsource of liquidity back into that industry. The second thing we will do is look to invest the funds into expansion of our lending programs. We are a community bank and as I stated above, community banks take in deposits, then turn around and lend those deposits right back out to businesses and consumers within our community. Our mission is to provide a safe and reliable source of funding for our businesses here along the Central Coast.
Thank you for your continued interest in Heritage Oaks Bank/Business First. Every day we serve in the best interest of our customers and employees as we strive to become the best Community bank in California.
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